Tuesday, March 9, 2021

OPINION AND ANALYSIS | 28-12-2019 08:59

Buying time

It is difficult to imagine how Alberto Fernández’s pompous rhetoric, and lack of a concrete and structural plan, will “put Argentina back on its feet,” as he promised throughout the campaign.

As the Peronist leader has repeated endlessly, the nation is in a dire situation and it will be extremely difficult to find a way out of this social and economic mess (which didn’t begin with Mauricio Macri but was surely intensified by the former president’s four years in office). Some of the policy announcements are even counterintuitive on the face of them, such as the idea that economic activation will occur based on consumption by the lower classes, while taxes are being aggressively raised on the economy’s most productive sectors.

Every plan is derived from a series of axiomatic building blocks from which hypotheses are formulated and eventually executed. All of these, by definition, are based on uncertain outcomes, and thus there is no plan without risk. Macri had a macroeconomic plan. And it almost worked, before quite literally crumbling in on itself. According to the current leader of the opposition and his team, Argentina needed to generate credibility in order to attract productive investment that would eventually translate into a vibrant export sector capable of producing enough dollars to satiate domestic demand. This implied an absolute liberalisation of currency markets, aimed at attracting speculative capital first, to then construct the conditions for productive investments in the real economy mainly through a series of structural reforms. Inflation, a monetary phenomenon also tied to the peso-dollar exchange rate, would fall as the monetary base is contracted and trust and productive investment leads to a strengthening of the peso. In order to finance this, given the large deficit left behind by Cristina Fernández de Kirchner, Macri relied on an expansive foreign policy that allowed him to borrow widely, and recklessly.

At the end of the day, Macri’s “plan” imploded catastrophically, revealing its internal weaknesses. Without reforms that guarantee a reduction in spending, in order to tackle the fiscal deficit, the only way out is an incredible streak of luck that would grant Argentina a positive exogenous shock. Instead, Macri and his Cambiemos (“Let’s Change”) coalition lost governability by leading ineffective battles, such as his failed provisional reform that actually raised the deficit, and then folded under the weight of the sovereign debt as a series of tough devaluations shocked the system. At the end, the International Monetary Fund and the market applied tough austerity on the population, and led Macri out of the Casa Rosada.

So what is Alberto’s plan? It’s not entirely clear, but some of the building blocks are beginning to appear through the shadows. Fortunately, Economy Minister Martín Guzmán has consistently indicated that money printing is not the solution to Argentina’s structural deficits. Still, the Central Bank led by Miguel Ángel Pesce just wired 100 billion pesos to the Treasury, which, added the five transfers that ex-chief Guido Sandleris executed in his last moments at the institution takes the monetary expansion to 290 billion pesos. According to President Fernández’s emergency law, that figure can (and probably will) rise to 400 billion pesos. These funds must be added to what the Peronists expect to raise from raising taxes, which some experts estimate at 1.5 percent of GDP, and cost cutting — mainly what is being taken from “richer” retirees and a reduction in subsidy spending — for another 0.5 percent.

“Putting money in people’s pockets,” is a phrase often repeated by Fernández and his ministers, and they plan to do that with the aforementioned funds and the freezing of price increases for both public and private goods and services for 180 days. There is, of course, an academic debate as to whether consumption can truly jumpstart the economy sustainably, but it is clear it will initially produce a boost. All of this will happen in parallel to a negotiation with the IMF and private creditors over the restructuring of the debt under conditions Guzmán considers fair, which means allowing Argentina not to pay for several years. A successful resolution of Argentina’s sovereign debt problem, whatever that may be, is a key ingredient in Alberto’s plan of finding a solution to the country’s economic and social woes.

But it is by no means enough, as we still haven’t seen what President Fernández plans to do to generate productive investment and global competitiveness in order to export dollar-denominated assets. And herein lays the key of Argentina’s eight previous sovereign debt defaults, and the imminent but apparently receding risk of a new capital event. Alberto’s Frente de Todos (“Everyone’s Front”) has tried to buy time, asking for 180 days to figure out what its plan is, while trying to tick the necessary boxes on the path to sustainability. For now, they count with the support of a large part of the population, and enough congressional muscle. Until they come up with a plan, though, it is nothing more than that: buying time.

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Agustino Fontevecchia

Agustino Fontevecchia


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